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3 Top Software-as-a-Service Stocks to Buy in June

By Nicholas Rossolillo – Jun 5, 2021 at 7:00AM

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Cloud computing stocks are down, but most are certainly not out.

This past spring has not been kind to software-as-a-service (SaaS) stocks. After an epic rise during the first year of the pandemic, many of them have taken steep double-digit-percentage hits as of late. The problem isn't with cloud-based businesses themselves, but rather general investor rotation into companies that could benefit from "economic reopening" as consumer behavior starts to normalize again.

The cloud is a secular growth trend, though, and many SaaS stocks are now on sale. Three that look like especially good buys in June are Palo Alto Networks (PANW 1.38%), Anaplan (PLAN), and PubMatic (PUBM 1.22%).

Palo Alto Networks: The cybersecurity leader for a compelling value

Cybersecurity has been in the spotlight in the last year. As the world goes digital, keeping digital systems secure is more important than ever. Recent attacks that have temporarily closed real-world operations (like the Colonial Pipeline) illustrate this fact. Firms that can help keep businesses safe are in high demand.

That's why I think leading cybersecurity firm Palo Alto Networks is a compelling stock right now. After making numerous acquisitions of smaller peers the last few years to update its suite of services for the cloud era, the company's takeover-happy strategy is starting to pay off. It's picking up plenty of new customers, and existing customers are spending more on PANW's extensive security platform.

As a result, revenue rose 24% year over year to $1.1 billion during PANW's fiscal 2021 third quarter (the three months ended April 30, 2021), and management said to expect similar year-over-year revenue growth during the final three months of the fiscal year.  

The bottom line is starting to rally as well. Free cash flow is up 69% over the last trailing 12-month stretch to $1.39 billion as the company starts to digest the cost of making over a dozen takeovers. Over the last year, free cash flow profit margin is sitting at 35% of revenue, a very healthy rate that feeds into a healthy balance sheet. PANW finished April 2021 with $2.95 billion in cash and equivalents and $3.19 billion in convertible debt.

Palo Alto Networks' stock trades for a very reasonable 25 times trailing 12-month free cash flow as of this writing. Given the company's fast and steady sales growth and enviable profit margin, it's a fair price to pay for the leading cybersecurity software pure-play.  

Someone sitting at a desk, using a laptop and smartphone.

Image source: Getty Images.

Anaplan: Steadily growing connected enterprise planning

Enterprise software took one on the chin in 2020. Faced with uncertainty during the start of the pandemic, many organizations halted their spending on new tech initiatives. But purse strings have been loosening up again this year, especially on software that can help make a business more efficient.

Enter Anaplan, which developed a cloud-based enterprise resource planning platform that connects data from across an organization to help teams make better decisions. Add in some machine learning (a branch of artificial intelligence) to help forecast outcomes and a collaborative workspace built for a new era of remote work, and the result is a powerful software offering that helps large organizations break down barriers between their various operating arms.

In spite of a tough year, Anaplan reported having over 1,700 customers in total, 473 of which spend at least $250,000 a year (compared to just 367 last year).

Those new customers, plus Anaplan lapping the first round of lockdowns last spring to halt the spread of COVID-19, resulted in a 25% year-over-year increase in revenue to $129.8 million. Free cash flow has also turned positive as Anaplan starts to reach a profitable scale. Free cash flow generated was $7.6 million in the fiscal first quarter, compared to negative $6.0 million a year ago. The SaaS company also had $328 million in cash and equivalents and no debt on its balance sheet, giving it ample room to market aggressively to new customers.  

Management expects current-year sales to be up at least 24% as it steadily adds new users and expands the use of its planning software with existing ones. Given this outlook, shares look like a long-term value at 13 times expected current fiscal-year sales, and Anaplan in the early stages of turning a profit should help the valuation going forward as well. I'm a buyer after this stock's recent 40% plunge from all-time highs.  

PubMatic: Digital ads are on the rise

PubMatic got off to a hot start after its IPO in December 2020. The digital advertising software upstart more than doubled in its first few months as a public concern. But the market humbled the high-flying adtech firm, and shares are trading close to where they started when they made their debut last winter.  

After PubMatic's stellar first-quarter 2021 earnings report, now looks like the time to at least add this fresh IPO stock to your watchlist. Revenue jumped 54% year over year to $43.6 million. Though this is a small software firm, it's already profitable. Net income was $4.9 million in Q1. Full-year revenue guidance calls for growth of at least 31%, and management expects to generate adjusted EBITDA profit margin of at least 27%. And to sweeten the deal, PubMatic ended the first quarter with $110 million in cash and equivalents and no debt.  

Digital ads are making a comeback this year, and mobile advertising in particular will be a standout. PubMatic cited an eMarketer report on its last earnings call that said global mobile ad spending should increase 23% in 2021. Half of PubMatic's software platform addresses this realm, and many ad publishers utilizing its tech operate in the food and drink and fashion industries, both of which are rallying as the economy starts to reopen.  

PubMatic stock trades for just 7.5 times full-year expected sales and is a highly profitable SaaS firm. As the global marketing empire moves to a more efficient cloud computing-based operating model, PubMatic could be a big winner. I plan to start nibbling on this stock this month.

Nicholas Rossolillo and his clients own shares of Anaplan Inc and Palo Alto Networks. The Motley Fool owns shares of and recommends Anaplan Inc, Palo Alto Networks, and PubMatic, Inc. The Motley Fool has a disclosure policy.

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Stocks Mentioned

PubMatic,  Inc. Stock Quote
PubMatic, Inc.
$16.58 (1.22%) $0.20
Palo Alto Networks, Inc. Stock Quote
Palo Alto Networks, Inc.
$165.91 (1.38%) $2.25
Anaplan Stock Quote

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